Wednesday, July 15, 2009

Big Changes at FHA, including New Tech

Logo of the Federal Housing Administration.Image via Wikipedia


I got the news from a story on Forbes.com today that the David Stevens has finally been sworn in to serve as FHA commissioner. This has been a long time coming and there were some politics involved. We'll soon know whether he can handle the job.

He's taking over an agency that has become the last hope for millions of subprime borrowers who are still able to make payments on a mortgage but no longer fit the requirements of conventional lenders. Making up about 3% of total loan volume since the early 80s, the agency is now insuring close to a third of all mortgages written, which is expected to be about $400 billion this year, according to Forbes.

Forbes said what I said not long ago in a column I wrote for HousingWire (how's that for name dropping): the big hurdle for FHA is technology. Forbes points to 39 old computers that are on average 19 years old--that's around 190 years in computer years. For most mortgage lenders, the key technology offered by the agency is the FHA TOTAL Scorecard, a simple algorithm used to generate an “accept” or “refer” decision on FHA loans.

The tool can't pull or parse credit on its own but takes information from the lender's AUS to return a decision. There are only a handful of underwriting systems that are integrated into the Scorecard: Fannie’s DU, Freddie’s LP, Chase’s ZippY and Countrywide/BofA’s CLUES/CLOUT.

At least until a few weeks ago. Loan-Score Decisioning Systems, Irvine, Calif., a provider of enterprise-class decision management solutions, completed the necessary integration for lenders to connect to the Federal Housing Administration’s TOTAL Scorecard platform directly from its automated underwriting system (AUS) last month.

“The demand for FHA products has increased rapidly and our integration with TOTAL Scorecard allows clients to more efficiently manage the FHA lending process and provide better service to borrowers,” said David P. Colwell, executive vice president at Loan-Score, in a release at the time. “In order to attain results from TOTAL Scorecard, lenders must use an AUS to connect to the system. Because Loan-Score is now an FHA integrated AUS, our clients’ end users are able to seamlessly hit TOTAL Scorecard for instant, accurate decisioning. Loan-Score’s centralized automated underwriting platform also accompanies our product eligibility and pricing engine (PPE) to deliver a comprehensive, integrated decisioning solution for both the point-of-sale and back-office. This establishes a significant competitive advantage over vendors who only offer a PPE system.”

"We’ve worked on this project for over a year," Joe Bowerbank, chief marketing officer for Loan-Score, told me in an e-mail. "The hard-hitting financial crisis news that went down in the fall coupled with a change in administration didn’t help timelines. Still, we worked diligently with the FHA to complete an integration between our AUS and their Scorecard platform."

According to Loan-Score, the new integration offers efficiencies and cost savings. Lenders that use DU or LP pay fees that can range from $15 to $30 a transaction to hit Scorecard, Bowerbank said. And that's whether or not the deal will fly. Chase and BofA will not charge a lender, if the loan comes to them.

"We anticipate that this news will have quite an impact on the industry as it relates to FHA underwriting," Bowerbank said. "Other vendors have been trying to develop an integration, but Loan-Score is the first. And, only vendors with a true AUS can come to the dance."